On September 24, 2018, France’s President Emmanuel Macron presented the draft 2019 Budget to the National Assembly. The budget includes several BEPS recommendations on VAT, interest expense, and taxation of intangible assets.
Digital tax
The draft budget proposes to transpose EU Directive 2017/2455 into domestic law. The purpose of these provisions is to amend the place of taxation for VAT, and to propose rules for invoicing electronic and telecommunications services. See BEPS Action 1.
In general, when services are provided to non-taxable persons, these benefits are taxable in the member state of consumption. Under the proposed budget, these services will be taxable in the service provider’s country of establishment when the annual amount is less than €10,000. The operator will be subject to French invoicing rules, even though the place of taxation would not be in France.
Interest expense
The draft budget proposes to transpose Article 4 of ATAD 1 (2016/1164) into domestic law. Excessive borrowing costs are deductible in the tax period in which they are incurred only up to 30 percent of the taxpayer’s earnings before interest, tax, depreciation, and amortization (EBITDA). Alternatively, the taxpayer can deduct excessive borrowing costs up to EUR 3 million. See BEPS Action 4.
Patent box
In France, concession fees and capital gains from patent and property rights currently benefit from a reduced tax rate (15% for companies liable to corporation tax instead of the standard 33.33% rate) The current regime applies to both developed and acquired patents.
According to the BEPS Action 5 final report, countries agreed that the substantial activity requirement used to assess preferential regimes should be strengthened in order to realign the taxation of profits with the substantial activities that generate them. Consensus was reached on the “nexus approach,” which was developed in the context of IP regimes. This approach allows a taxpayer to benefit from an IP regime only to the extent that the taxpayer itself incurred qualifying R&D expenditures that gave rise to the IP income.
Since the French regime does not follow the “nexus” approach, France proposes to align its patent box regime with international and European standards, so that the income benefiting from the regime is in proportion to the level of R&D expenditure incurred in France by the taxpayer in creating or developing the intangible asset. In addition, the patent box would exclude unpatented inventions, but would include original software by copyright.
France proposes to apply the 15% tax rate, irrespective of the company’s tax regime (whether subject to corporation tax or income tax). To limit company reporting requirements, the documentation required to monitor R&D expenditure will only be produced upon request by the tax administration during a tax audit.
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